A Proposal to Finance Long-Term Care Services through Medicare with an Income Tax SurchargeRichard W. Johnson, Leonard E. Burman The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
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We propose a new system of financing long-term care services in the United States. Our plan expands Medicare to cover comprehensive long-term care services, including home care and custodial nursing home care. Beneficiaries would share in the cost of services through deductibles and copayments, but the program would include stop loss coverage and special protections for low-income adults. By providing long-term care insurance that actually protects the assets of older adults, our proposal would eliminate the disincentive to save inherent in the means-tested Medicaid system. Our plan would also remove the bias in the current system for institutional care, enabling more persons with disabilities to remain at home where most prefer to live. We propose to finance this expansion of Medicare benefits with a surcharge on federal income taxes. Unlike the regressive payroll tax that finances Medicare’s hospitalization coverage, the surcharge we propose would not increase tax burdens for low-income individuals or families. All of the revenue generated by the tax would be dedicated to a special Medicare trust fund that would finance future long-term care services.
The financing of long-term care services for elderly adults is a critical public policy issue. As baby boomers age, the number of older Americans will soar over the next few decades. Between 2000 and 2040, the population aged 65 and older will almost double, to 77.2 million, while the population aged 85 and older will more than triple, to 14.3 million (U.S. Census Bureau 2000). Despite recent improvements in health at older ages (Manton and Gu 2001; Freedman et al. 2004), many elderly Americans will continue to need assistance with basic personal care. The Congressional Budget Office (1999, 2004) estimates that the number of Americans aged 65 and older with long-term care needs will increase from 8.8 million in 2000 to at least 12.1 million in 2040.
The family has traditionally been an important provider of care to the frail elderly. Most older persons with disabilities live in the community, not in nursing homes (Feder, Komisar, and Niefeld 2000), and receive care from spouses and adult children (Johnson and Wiener 2006). The availability of informal care is a critical factor in enabling frail elders to live independently in the community (LoSasso and Johnson 2002). However, it is unlikely that family caregivers alone can meet the expected rise in long-term care needs. Women are much more likely than men to provide care to their parents (Mui 1995), but many are being forced to reduce the amount of time they devote to caregiving activities as more and more women enter the labor force. And declining fertility rates may limit the number of adult children who will be available to provide care to their parents in the future. As a result, an increasing number of older adults may rely on paid helpers in the next few decades, either at home or in institutions, to meet their long-term care needs.
Despite the growing importance of formal long-term care services in the United States, there are significant problems with the way in which they are now financed. Most nursing home costs are paid by the public sector today. Although this is clearly a boon for frail elderly Americans, the availability of public funds for long-term care services discourages individuals from preparing for their own long-term care needs when they are young and healthy. Medicaid eligibility rules impose a nearly 100 percent tax on income and assets for nursing home residents. This implicit tax may be an important factor behind the alarmingly low savings rate for middle-class Americans. The current system also favors institutional care over home- and community-based services, which are not as heavily subsidized as nursing home services.
Private insurance is available for long-term care expenses, but coverage rates are very low. Adults may be reluctant to purchase long-term care policies because Medicaid will pay for expenses that exceed their financial resources. Other problems with the private market for long-term care insurance include benefits that often turn out to be inadequate to cover future expenses, high load factors, large year-to-year premium increases and resultant high nonrenewal rates, and serious adverse selection problems.
To remedy the problems with the current system, we propose expanding Medicare to cover comprehensive long-term care services, including home care and custodial nursing home care. Beneficiaries would share in the cost of services through deductibles and copayments, but the program would include stop loss coverage and special protections for low-income adults. By providing long-term care insurance that actually protects the assets of older adults, our proposal would eliminate the disincentive to save inherent in the means-tested Medicaid system. Our plan would also remove the bias in the current system in favor of institutional care, enabling more persons with disabilities to remain at home where most prefer to live. We propose to finance this expansion of Medicare benefits with a surcharge on federal income taxes. Unlike the regressive payroll tax that finances Medicare’s hospitalization coverage, the surcharge we propose would not increase tax burdens for low-income individuals or families. All of the revenue generated by the tax would be dedicated to a special Medicare trust fund that would finance future long-term care services.
(End of excerpt. The complete report is available in PDF format.)
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